Cambridge International as and a level Economics Ebook

External economies of scale 
are particular benefi ts 
received by all the fi rms in the industry as a direct 
consequence of the growth of the industry and may be 
one reason for the trend towards the concentration of 
rival fi rms in the same geographical area. Th
e advantages 
may include the availability of a pool of skilled labour 
or a convenient supply of components from specialist 
producers who have grown up to make the items for 
all the fi rms. Th
ey may all benefi t from greater access 
to knowledge and research and the better transport 
infrastructure that will result from the general expansion 
of such fi rms. Silicon Valley in California is a typical 
example. Another more recent one is Cambridge, where 
there is a concentration of biotech and electronics fi rms, 
many of which have research and development links with 
the university.
External economies of scale: 
cost savings accruing to all 
firms in an industry as the scale increases.
KEY TERM
However, there are limits to economies of scale. A fi rm can 
expand its output too much with the result that unit costs 
start to rise; effi
ciency is therefore compromised. Th
is 
may be the beginning of diseconomies of scale. Th
e most 
likely source of these lies in the problems of coordinating 
large organisations and the eff ect size has on morale and 
motivation of the workforce.
In the same way as internal diseconomies of scale 
are possible, the excessive concentration of economic 
activities in a narrow geographical location can also 
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Cambridge International A Level Economics

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have disadvantages. External diseconomies may exhibit 
themselves in the form of:
■
traff ic congestion which increases distribution costs
■
land shortages and therefore rising fixed costs
■
shortages of skilled labour and therefore rising variable costs.
A fi rm that is producing at its optimum output in the short 
run and the lowest unit cost in the long run has maximised 
its effi
ciency. Th
is is known as the